The Endogenous Growth Theory And Economic Growth

2.1.1 Endogenous Growth Theory

Endogenous growth theory believes that economic growth is the main result of the internal factor rather than external forces. Endogenous growth economy emphasizes that investment in innovation, knowledge and human capital have a significant influence on the economic growth. The endogenous theory can be interpreted by a simple equation Y=AK. Where Y is the output, A is a constant that reflects all the factors that influenced technology, and K reflects the capital which including human capital. The endogenous theory assumes that the output will be better if the K (capital) has wider assumptions which treat knowledge as a kind of capital. Knowledge as a capital is an important input in the economy. (Mankiw, 2006)

The endogenous growth theory primary concern the policy measures in economic which will bring impact on economic growth rate in a long run. At the same time, it will drive the active involvement of the public in stimulating the economic growth through direct investment or indirect investment for human capital. For instance, the government yearly budgeting policy that mandates a 20 percent of the budgeting must be allocated to the education. The allocation can be for facilitating the school enrolment or as a scholarship and subsidies for research and development. By doing so, there will be a knowledge which in the long term will lead to economic growth. In this case, the government contribution to economic growth can be seen through their influence in changing the consumption or spending for public investment. (Todaro,

All obstacles in the opportunity both in economy and politic must be eliminated so that the peoples can participate and benefited from the existing opportunity.

• Sustainability

Make sure the access to the opportunity is not only for this generation but also for future generations. All of the capital, whether it is human or physic have to be equipped.

• Empowerment

The development must be done by people. People must fully participate in making a decision and the process that will affect their lives.

The Human Development Index (HDI) was created to emphasize that in assessing the developed country, economic growth is not the only indicator. People and their skill and capabilities should be measured as the criteria for assessing economic growth.

The HDI is a series of measurement on the primary dimension of human development on average such as being knowledgeable, a long and healthy life, and have a decent standard of living. The education dimension is measured by the average of years of schooling for those 15 years old and above, the health dimension is assessed by life expectancy at birth, and the standard of living is measured by purchasing power or gross national income per capita. The results for these three dimensions are then aggregated into a composite index using geometric